"Not a Cure All, But..."

by the Sandwichman

From the Globe and Mail Report on Business, yesterday:

Yes you can: Save jobs by sacrificing your time and money.

As employers and employees confront the spectre of mass layoffs, creative measures are coming to the fore, including individual workers cutting their workweek to four days, with a proportional cut in pay.

The idea gained currency this week in U.S. President Barack Obama's call-to-duty inauguration speech. America's recovery, he said, in part will rely on "the selflessness of workers who would rather cut their hours than see a friend lose their job."

The Sandwichman points out the potential pitfall of the "proportional cut in pay" line. If workers are expected to handle the same workload in four days, it's just a speed-up with a pay cut. And what does that do to consumer spending? Here's where government needs to step in to make up the difference in pay as part of its economic stimulus package. More on that angle from Dean Baker in Monday's Guardian.

Charlton Heston: Gun Nut or Sandwich Man?

Sandwichman thinks he may have discovered a way to build traffic to the site. For the record, Sandwichman wonders, "what's the fuss?" One the one hand, I feel more threatened by SUV drivers talking on cel phones than I do by goons carrying guns. On the other hand, how come there isn't a second amendment right to bring your own damn water or toothpaste onto an airliner? I mean, "airport security" is so obviously about conditioning people to follow orders and not question authority.

Galbraith Part 2 on "Can Obamanomics Solve the Crisis?"

James K. Galbraith has a second part to his interview with Paul Jay on the real news. He goes on greater length about how it would be unwise to cut social security or medicare. He worries that Obama may be listening to those who want this, including conservative Democrats, but also notes that his public statements so far have not specifically said what to do about social security. "Wait and see," says Galbraith. He also addresses several other issues including the status of the dollar and the need for aid to those in danger of home foreclosures.

The link.

A Grammar of the Multiplier

by the Sandwichman

Paolo Virno's A Grammar of the Multitude is a short book, but it casts a very long shadow. Behind it looms the entire history of the labor movement and its heretical wing, Italian "workerism" (operaismo), which rethought Marxism in light of the struggles of the 1960s and 1970s....

6.5. Thesis 4

For the post-Fordist multitude every qualitative difference between labor time and non-labor time falls short...

The concept of "full employment" is obviously essential to any consideration of the Keynesian "multiplier". Yet the very distinction between employment and unemployment is what, according to Virno, is at stake in Post-Fordist society.

The Sandwichman can do little more here than simply to note the existence of the operaismo analysis. I have my reservations about the degree of abstraction of that analysis and it's exclusive historical contextualization in a brief and recent expanse of European history. Nevertheless, the very term, "Post-Fordist," calls into question glib manipulation of Keynesian terminology.

If we can say that Fordism incorporated, and rewrote in its own way, some aspects of the socialist experience, then post-Fordism has fundamentally dismissed both Keynesianism and socialism. Post-Fordism, hinging as it does upon the general intellect and the multitude, puts forth, in its own way, typical demands of communism (abolition of work, dissolution of the State, etc.). Post-Fordism is the communism of capital.

James Callaghan, in 1976:

We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.

Barro on the Fiscal Policy Multiplier: Does He Understand the Full Employment Constraint?

Robert Barro writes an op-ed critiquing the Obama fiscal policy proposal that is far below his intellectual standards. He starts off well:

Team Obama is reportedly using a number around 1.5. To think about what this means, first assume that the multiplier was 1.0. In this case, an increase by one unit in government purchases and, thereby, in the aggregate demand for goods would lead to an increase by one unit in real gross domestic product (GDP). Thus, the added public goods are essentially free to society. If the government buys another airplane or bridge, the economy's total output expands by enough to create the airplane or bridge without requiring a cut in anyone's consumption or investment. The explanation for this magic is that idle resources -- unemployed labor and capital -- are put to work to produce the added goods and services. If the multiplier is greater than 1.0, as is apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment.

In other words, Barro understands that the Keynesian multiplier theory rests on the proposition that the economy is below full employment – which seems like a plausible characterization of today’s economy. But then Barro pulls some empirical research from a period where we were likely near full employment:

A much more plausible starting point is a multiplier of zero. In this case, the GDP is given, and a rise in government purchases requires an equal fall in the total of other parts of GDP -- consumption, investment and net exports. In other words, the social cost of one unit of additional government purchases is one … What do the data show about multipliers? Because it is not easy to separate movements in government purchases from overall business fluctuations, the best evidence comes from large changes in military purchases that are driven by shifts in war and peace. A particularly good experiment is the massive expansion of U.S. defense expenditures during World War II … I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports -- personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses -- there was a dampener, rather than a multiplier.

After saying “good grief”, I turn the microphone over to Paul Krugman:

Consumer goods were rationed; people were urged to restrain their spending to make resources available for the war effort. Oh, and the economy was at full employment — and then some. Rosie the Riveter, anyone? I can’t quite imagine the mindset that leads someone to forget all this, and think that you can use World War II to estimate the multiplier that might prevail in an underemployed, rationing-free economy.

Mainstream Media Fights for the Little Guy in the Spirit of the Muckrackers

This article shows the ridiculous lengths that economists can go in defending the indefensible:

I. J. ALEXANDER DYCK, University of Toronto - Joseph L. Rotman School of Management
DAVID A. MOSS, Harvard Business School - Business, Government and the International Economy Unit

LUIGI ZINGALES, University of Chicago, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR), University of Chicago - Polsky Center for Entrepreneurship, Graduate School of Business, European Corporate Governance Institute (ECGI)

We argue that profit-maximizing media help overcome the problem of "rational ignorance" highlighted by Downs (1957) and in so doing make elected representatives more sensitive to the interests of general voters. By collecting news and combining it with entertainment, media are able to inform passive voters on politically relevant issues. To show the impact this information has on legislative outcomes, we document the effect "muckraking" magazines had on the voting patterns of U.S. representatives and senators in the early part of the 20th century. We also show under what conditions profit-maximizing media will cater to general (less affluent) voters in their coverage, providing a counterbalance to special interests.

Galbraith on "Can Obamanomics Solve the Crisis?"

The answer is, maybe not. The crisis is deep and more direct intervention will be needed in both banking and shoring up purchasing power, according to James K. Galbraith in an interview on the real news, accessible here.

He especially worries about the shift I have posted on here in a worried manner that Obama seems to have drunk the social security kool-aid and may be looking at long term cutbacks in benefits. Instead of my "stand pat" and do nothing to/with social security, he actually calls for increasing social security benefits.

BTW, the tux he is wearing in the clip was apparently for going to some bipartisan inaugural ball in honor of John McCain. Go figure.

BIG in Japan... Work Sharing

by the Sandwichman

This is how it begins. With baby steps. Experience with these kinds of programs in the past is that people learn they actually like the extra free time.

In the deep south of Japan sits the tiny island of Himeshima. Farmers cultivate delicious prawns, the rare chestnut tiger butterfly flitters around the beach and 2,400 islanders wallow in total job security.

It has been so on Himeshima for 40 years and suddenly, faced with the most alarming economic downturn since the Second World War, everyone from the central Government in Tokyo to the country's biggest industrial conglomerates is desperate to copy its secret: work sharing...

Tactics for hard times as Japanese turn to job-sharing

Business groups split over work sharing

Helping Employers Cut Hours, Not Jobs

Business bigwig suggests work-sharing schemes to cope with tough times

"the selflessness of workers who would rather cut their hours than see a friend lose their job..."

President Obama

INAUGURAL ADDRESS

As we consider the road that unfolds before us, we remember with humble gratitude those brave Americans who, at this very hour, patrol far-off deserts and distant mountains. They have something to tell us, just as the fallen heroes who lie in Arlington whisper through the ages. We honor them not only because they are guardians of our liberty, but because they embody the spirit of service; a willingness to find meaning in something greater than themselves. And yet, at this moment — a moment that will define a generation — it is precisely this spirit that must inhabit us all.

For as much as government can do and must do, it is ultimately the faith and determination of the American people upon which this nation relies. It is the kindness to take in a stranger when the levees break, the selflessness of workers who would rather cut their hours than see a friend lose their job which sees us through our darkest hours. It is the firefighter's courage to storm a stairway filled with smoke, but also a parent's willingness to nurture a child, that finally decides our fate.

Our challenges may be new. The instruments with which we meet them may be new. But those values upon which our success depends — hard work and honesty, courage and fair play, tolerance and curiosity, loyalty and patriotism — these things are old. These things are true. They have been the quiet force of progress throughout our history. What is demanded then is a return to these truths. What is required of us now is a new era of responsibility — a recognition, on the part of every American, that we have duties to ourselves, our nation, and the world, duties that we do not grudgingly accept but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character, than giving our all to a difficult task.

ACCEPTANCE SPEECH, DEMOCRATIC NOMINATION

America, this is one of those moments.

I believe that as hard as it will be, the change we need is coming. Because I’ve seen it. Because I’ve lived it. I’ve seen it in Illinois, when we provided health care to more children and moved more families from welfare to work. I’ve seen it in Washington, when we worked across party lines to open up government and hold lobbyists more accountable, to give better care for our veterans and keep nuclear weapons out of terrorist hands.

And I’ve seen it in this campaign. In the young people who voted for the first time, and in those who got involved again after a very long time. In the Republicans who never thought they’d pick up a Democratic ballot, but did. I’ve seen it in the workers who would rather cut their hours back a day than see their friends lose their jobs, in the soldiers who re-enlist after losing a limb, in the good neighbors who take a stranger in when a hurricane strikes and the floodwaters rise.

This country of ours has more wealth than any nation, but that’s not what makes us rich. We have the most powerful military on Earth, but that’s not what makes us strong. Our universities and our culture are the envy of the world, but that’s not what keeps the world coming to our shores.

Instead, it is that American spirit – that American promise – that pushes us forward even when the path is uncertain; that binds us together in spite of our differences; that makes us fix our eye not on what is seen, but what is unseen, that better place around the bend.

Gun Nuts Exposed at Distorting Data and Results

In the latest Econ Journal Watch, just out, Ian Ayres and John J. Donohue III have a paper, "Yet another refutation of the more guns, less crime hypothesis - with some help from Moody and Marvell" accessible (hopefully) at http://www.aier.org/ejw/archive/comments/doc_view/4018-ejw-200901?tmpi=component&format=raw.

Besides recounting how the major study by John Lott and Mustard has lots of data problems and cut off just before the post-1992 crime decline, they focus on a paper by Moody and Marvell that claims that a study of 24 states showed a reduction in crime for increasing access to guns. It turns out that in this study 23 of the 24 states had the opposite result, and the aggregate result was solely due to Florida. However, the data in Florida is all messed up and also probably caught a general crime wave decline due to a regression to the mean after the Mariel boat landings from Cuba in the early 1980s. I am not doing their paper justice, but the media discussion is often dominated by Lott and his allies who are now pushing for loosened gun laws in Virginia, and are counting on Dems laying low and not challenging their incessantly repeated claims that such gun law relaxations reduce crime. They should not lay low. The claims are baloney and lies, based on distorted date and misrepresentations of results from ones with better data.

Communists at the Inaugural Concert!

I was happy to see Pete Seeger at he Inaugural Concert (with the Boss in tow), singing all of the verses of This Land is Your Land, including the rarely sung:

As I was walkin'
Right there in front of me
Was a great big sign,
Said "Private Property"
But on the other side
It didn't say nothin'
'Cause this land was made for you and me.

Oh and speaking of Paul Samuelson, as Barkley has been, he has to be one of the funniest of all economists - a low bar I know. For example, his "algorithm" for solving the Transformation Problem: "Write down Values. Erase. Write down Prices." I think this was the same article where he called Marx "a minor Post-Ricardian." I have to admit, though, when I first read the article, I wasn't laughing. Spitting, more like. Ah, youth!

Britain needs a shorter-hours culture

by the Sandwichman

David Spencer in the Guardian this morning echoes two of the Sandwichman's favorite talking points:

In a letter to the poet TS Eliot in 1945, he [Keynes] suggested that unemployment could be lowered by the reduction in working time. Indeed for Keynes this was the "ultimate solution" to the unemployment problem. Reducing work time not only extended the time during which workers could spend income and hence generate employment, but it also allowed jobs to be spread out more evenly across the available workforce, thereby reducing unemployment.

and...

Orthodox economic theory teaches that those who argue for shorter working time succumb to the "lump of labour fallacy". This is the idea that there is a fixed amount of work to be done in society, so any reduction in work hours must increase the number of available jobs. It is argued by orthodox economists that the amount of work is not fixed and that reductions in work time will simply add to firms' costs. But the above fallacy is not wholly persuasive. If reduced hours encourage people to work more efficiently, then the effect may be to lower prices and to increase the demand for goods and services and in turn the demand for labour.

UK Government Adopts Nationalization of Troubled Banks

Bloomberg reports that Gordon Brown has been listening to economists:

Prime Minister Gordon Brown’s government tightened its grip on Britain’s financial system, guaranteeing toxic assets and giving the Bank of England unprecedented power to buy securities. The plan will increase the cost of bailing out the nation’s banks by at least 100 billion pounds ($147 billion), the Treasury said in a statement today. The government raised its stake in Royal Bank of Scotland Group Plc to 70 percent and said it would use Northern Rock Plc to spur mortgage lending. “This is aiming to once and for all underpin faith in the banking system,” said Alan Clarke, an economist at BNP Paribas SA in London. “We’re breaking all conventions. The availability of credit is going down and the economic outlook is getting worse, so the government is having to throw more and more at it.” The new measures are the biggest steps by Brown to get banks lending again as Britain slides deeper into a recession that may be the worst since the aftermath of World War II. The government will require aid recipients to sign “specific and quantified” agreements to lend, reflecting Brown’s frustration at the failure of an October rescue to unlock credit markets.

Felix Salmon looks at the troubles at Bank of America and Citigroup and recommends we adopt nationalization:

Citi and BofA aren't suffering from liquidity problems. They have all the liquidity they need, thanks to the Fed. The problem is one of solvency: the equity markets simply don't believe that the banks' assets are worth more than their liabilities. I can't see a solution to this problem short of nationalizing both Citi and BofA, and summarily firing the hapless Vikram Pandit along with the overambitious Ken Lewis.

But it seems that we Americans are heading down a different route, which Paul Krugman doesn’t like:

On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion. So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope that shareholders will be rescued by a government bailout ... Well, the government could simply give Gotham a couple of hundred billion dollars, enough to make it solvent again. But this would, of course, be a huge gift to Gotham’s current shareholders — and it would also encourage excessive risk-taking in the future. Still, the possibility of such a gift is what’s now supporting Gotham’s stock price. A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners. The current buzz suggests, however, that policy makers aren’t willing to take either of these approaches. Instead, they’re reportedly gravitating toward a compromise approach: moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first.

Paul notes the American fear of the word nationalization and our willingness to give the troubled banks a gift by buying toxic assets at a “fair” price that exceeds the market value. In my view, this American way is just sheer insanity. We should watch and learn from the actions of the UK government.

Samuelson on Hayek, A Comment on Comments

Paul A. Samuelson has published "A few personal reminiscences of Friedrich von Hayek" in Journal of Economic Behavior and Organization, January 2009, vol. 69, issue 1, pp. 1-4, which I happen to edit, with an accompanying paper pp. 5-16 by Andrew Farrant and Edward MacPhail, entitled "Hayek, Samuelson, and the logic of the mixed economy?" One can link to Samuelson's paper at http://economistsview.typepad.com where Mark Thoma has it as one of his links for 2009-01-18 (easier than listing the whole url). In the last two days there have also been full blown postings on The Austrian Economists, Marginal Revolution, and Brad DeLong, with lots of furious commentary on the first two about it. While Samuelson praises Hayek's economics of information, saying he was the real winner of the socialist calculation debate and deserved his Nobel, PAS also criticizes his macroeconomic theory in comparison with Keynes's, argues his Road to Serfdom was wrong in forecasting that allowing for various forms of state intervention would lead to the road to serfdom, and dismisses Hayek's own criticisms of him on this matter, with Farrant and MacPhail examining the letter exchanges between them on this issue, and largely agreeing with PAS. The paper also has a long footnote highlighted by both Tyler Cowen at MR and Brad DeLong in which he reprises Melvin Reder's discussion of anti-Semitism by Keynes, Schumpeter, and Hayek, concluding that Keynes was the worst on this and Hayek the best of these three.

The comments on AE and MR have been mostly perfervidly livid at PAS over this article, going on about many points. However, I wish to address one in particular that has been brought up a bunch, one that was already mashed over in a posting and comments on Marginal Revolution by Tyler Cowen on 11/20/08. Responding to a nasty quote by PAS in Spiegel that "libertarians are emotional cripples," he linked to p. 416 of Mark Skousen's The Making of Modern Economics, who quoted the 13th edition of Samuelson and Nordhaus Economics from 1989, p. 387: "The Soviet economy is proof that, contrary to what many skeptics had earlier believed [a reference to Mises and Hayek](bracketed remark by Skousen) a socialist command economy can function and even thrive." Cowen and others have jumped on this as proof that Samuelson is "incompetent" and a lot worse, even though he cited CIA data for his claims, and also of course these commentators claiming the superiority of Hayek and how dare Samuelson say all those bad things about him.

Well, some of the language in Samuelson's paper (which I edited), is a bit strong, but I agree with the substance of most of it. Furthermore, while Hayek argued that centrally planned socialism would be inefficient, an argument PAS agrees with, Hayek no more forecast the moment of the Soviet collapse than did PAS or the CIA or pretty much anybody other than a French sociologist named Revel in 1976. Also, the severe economic decline in the Soviet bloc largely came after the political collapse of the bloc. It is not at all clear such a collapse would have happened without the political collapse, if the Soviet leaders in 1989 had cracked down on the independence demonstraters in Lithuania, the people fleeing across the Hungarian border into Austria, and of course supported the Honecker regime in East Germany in preventing the Berlin Wall from falling. After all, the upshot of the Chinese crushing the demonstrations in Tienanman Square was continued economic growth with a gradual transition to its current peculiar mixed economy that has grown very rapidly. And for all the carrying on many make about the Soviet economy, while it may have been inaccurate to describe it in 1989 as "thriving," and it was falling behind the US in growth, technical innovation, and quality of goods, it was functioning, and the population was not starving or homeless or without clothing or education or medical care, although it was politically repressed. But it had provided the industrial expansion that allowed it to build a military capacity that defeated Hitler's military at Stalingrad and Kursk. In short, this dumping all over PAS for these statements is fairly ridiculous, whatever one thinks of Samuelson's ultimate or broader influence on economics as the godfather of its mainstream neoclassical form in the last half of the 20th century.

The comments at The Austrian Economists can be found at http://austrianeconomists.typepad.com/weblog/2009/01/samuelson-reminiscences-hayek-in-jebo.htm and the ones at Marginal Revolution are at http://www.marginalrevolution.com/marginalrevolution/2009/01/samuelson-on-hayek.html.

Sandwichman Reads the Footnotes (so you don't have to)

by the Sandwichman

The title of my last post was a composite allusion to The Rise and Fall of Economic Growth by H.W. Arndt (1978)and to chapter nine of Fred Hirsch's Social Limits to Growth (1976): "Political Keynesianism and the Managed Market." In his Managing Without Growth, Peter Victor cited Arndt's book extensively in his retelling of the short history of economic growth as prime policy objective.

Arndt concluded his book with a somewhat optimistic, albeit qualified, assessment of growth -- "the realistic question to ask is not whether further economic growth is possible or desirable, or even how rapid it should be, but what kind of growth we should aim at." In discussion "the right kind of economic growth," he footnoted Hirsch's book, "While this present book was in press, the implications for economic growth as a policy objective of 'positional competition' have been spelled out much more fully in an important and exciting book..." (which would have been clearer if he had stated it as "...the implications of 'positional competition' for economic growth as a policy objective have been spelled out...").

Admittedly, there is some discussion going on of what kind of spending is desirable in a stimulus package. But this is neither a secondary question nor a transitory one. It is, as Arndt termed it, the realistic question. When the question becomes "what kind of growth" instead of "how much growth," then some things that have in the past been growing may come to be excluded from the calculus as kinds of growth we don't actually want because they don't benefit society and they impose unacceptable costs on the environment, sociability, etc. It could even be that the sum total of those expendable kinds of growth results in a decline in Gross Domestic Product, which at any rate is not a good measure of social welfare.

Hitherto the "weapon of mass destruction" in defense of economic growth has always been the assumption that only through continued and fairly brisk growth could full employment be attained. That assumption is not tenable for two reasons. One, the political linkage between growth and full employment has been broken... and it has been broken by proponents of growth. Two, the claim to exclusivity relies on the reactionary political assertion that work-time reduction cannot play a positive role in maintaining full employment. That assertion is groundless.